We all want our families to enjoy peace of mind when we are when we are no longer with them. By purchasing life insurance, you’ll be one step closer to attaining this. You can take a policy that will give your beneficiaries the cash they need to cater to your final expenses, settle the debts that you might have left behind or meet their day-to-day needs.
You might wonder if your beneficiaries will have taxes to pay on any amount they might receive from the life insurance cover. Worry, no more, this is what happens when you are no longer there to watch over them.
In Canada, if you have a policy against your life, the proceeds will not be subjected to taxes. The Canadian Revenue Agency (CRA) does not treat the amount received by your beneficiaries as taxable income.
There are no death taxes owed by your beneficiaries or estate inheritance taxes; the estate pays the government any unpaid taxes. Any taxes due from your estate is paid before your estate is distributed to the sums you would want your beneficiaries to receive.
It is wise to have a beneficiary appointed on your policy because this will eradicate issues like having the estate designated automatically. If you appoint the estate as your beneficiary, the death benefits might be taxed.
Also, have an estate executioner appointed to carry out all the legalities. The executioner should settle your estate and get a clearance certificate from the government, which will confirm that there are no pending income taxes. This should be done before the estate is distributed, and in doing so, they will protect your beneficiaries from being held liable to any amount you might owe
The beneficiary of a life insurance policy doesn’t pay taxes when receiving any proceeds as a death benefit. However, few instances might lead to the recipient paying taxes in part or on all the earnings of the policy. If you do not elect to have your beneficiaries paid immediately after your death, and your proceeds are held for a given period of time by the insurance company, your heirs or beneficiaries will pay taxes due to the interest accrued during this period. When your heirs inherit your estate, they might have estate taxes to pay after death benefits are paid to the estate.
$10,000 is always exempted from tax, and the remaining death benefit proceeds are reported on tax returns. If, for example, the total amount is $40,000, your beneficiary will report $30,000 to their tax returns. This is done by whoever is inheriting, whether it is the spouse, an employee, or the estate if you, as the deceased, hasn’t named any beneficiary.
Where there are several beneficiaries, the exempted amount should be shared according to their allocated percentages. For instance, if four recipients are awarded each $10,000 from a lump sum of $ 40,000, each beneficiary will claim a tax exemption of $2,500 (1/4 of $10,000, the exempted amount).
Schedule a call with one of our financial experts to learn more about Life insurance policies and your Tax Free Death benefit.